Under The Microscope: Technical Analysis ETF (PDP)

by on March 31, 2010 | Updated April 2, 2010 | ETFs Mentioned:

While the ETF world started by focusing on tracking well known indexes such as the S&P 500, it has significantly branched out in recent years, giving investors funds tracking everything from commodity indexes to quantitative methodologies that attempt to deliver excess returns. These quant ETFs haven’t really hit it big yet, but have certainly attracted a fair amount of assets from investors who still believe in the benefits of stock analysis but are also eager to reap the benefits of the ETF structure. One interesting marriage is found in the PowerShares DWA Technical Leaders Portfolio (PDP), a fund that offers access to a strategy that buys and sell securities based on chart patterns and other technical indicators such as relative strength levels. 

Relative strength focuses on the idea that stocks showing high relative strength compared to broader indexes are likely to continue increasing in price, and it is better to buy those stocks than to buy stocks with falling prices. In other words, “[Prices] are never too high to begin buying or too low to begin selling,” according to Jessie Livermore. Relative strength investing is a relatively simple strategy, but there is ongoing debate over how the strength should be calculated and the effectiveness of such a strategy in an era when markets are more efficient than ever.

PDP may be appropriate for investors who believe in technical analysis (AP Photo/Kathy Willens) PDP tracks the Dorsey Wright Technical Leaders Index, which includes approximately 100 U.S.-listed companies that demonstrate powerful relative strength characteristics. The index is constructed pursuant to Dorsey Wright’s proprietary methodology, which takes into account the performance of each of the 3,000 largest U.S.-listed companies as compared to a benchmark index, and the relative performance of industry sectors and sub-sectors. Dorsey Wright believes that relative strength is a “very robust and adaptable stock selection method.” Furthermore, the firm states that its process for selecting stocks in the portfolio is “100% systematic” and that they “do not discuss what [they] think should be included or excluded from the portfolio. The systematic process determines the securities and weights, and [they] follow it without question.”

PDP’s portfolio uses a modified equal weighting methodology which assigns more weight to securities with better relative strength characteristics. The fund rebalances quarterly and produces a relatively high level of turnover; currently it stands at 87%. Due to this high level of turnover, the holdings could vary significantly from one period to the next; one quarter’s leaders could be the next quarter’s laggards, which could lead to the securities exclusion from the fund. Currently, the fund is heavy in consumer discretionary firms (which make up 20% of the total assets). Another 20% goes to industrial firms, while information technology firms constitute 18% of the fund. Some of the top holdings include Apple (3.5%), American Tower Corp. (3.45%), and Ventas (3.4%).

PDP is largely slanted towards mid cap firms which constitute close to 70% of the fund’s total assets. PDP has done very well using this strategy in 2010, posting a gain of 10% (by comparison, MDY is up about 9%). The fund is also up close to 60% over the past year, and charges an expense ratio of 0.60%.


For a more detailed discussion of relative strength, see this article.

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